Construction Home Loans
If you’re thinking about renovating or building a new home, you will need to become familiar with construction home loans. A construction home loan allows you to conveniently drawdown money at different stages throughout the building process. It is important to keep in mind that additional decisions will need to be made about the structure of your construction home loan, and the lender will also require additional documentation in order to approve your application.
Navigating construction home loans is slightly more complex when compared to standard home loans, this is why it’s very important to select the right home loan product that is aligned with your future goals. Working with a reputable Mortgage Broker could be just the right solution. If you would like to get a better idea of your borrowing power and what your likely repayments might be, try our Borrowing Power Calculator and Loan Repayment Calculator.
Understanding the construction process
A construction home loan is very different to a standard home loan, this is because it involves two separate lending transactions - one for the vacant land and another for the construction component. It’s very important to get started with the construction process as soon as possible. Most home loan lenders will require the construction process to commence within 6 months of approval, and the entire project must be completed within 24 months of approval. If there are significant delays with the project, this could trigger the lender to reassess the loan application.
The first thing you’ll have to do is pay your builder an upfront deposit to cover the initial cost of materials. However, the amount of this initial deposit depends on the fixed price building contract that you’ve negotiated with your builder. Generally speaking, the initial deposit will be around 5% of the fixed price building contract. You can choose to pay the initial deposit yourself, or alternatively your home loan lender can cover this cost for you if they have all the required documentation. Once the initial deposit has been paid, the builder will commence the construction process.
Along with the usual documents that are required when applying for a standard home loan, construction home loans will require a fixed price building contract and council approved plans so that a valuation can be performed. Further documentation will also be required before the first progress payment is made to the builder, this includes a schedule of the progress payments to be made and the builders insurance details. Any amendments to the contract or plans can trigger a lender to reassess the suitability of home loan application, therefore it is highly recommended that the documentation that is supplied to the lender is final.
Consider the progress payment schedule
Unlike a standard home loan, a construction home loan is paid in portions known as progress payments. Progress payments are designed to mitigate the risks associated to both the lender and borrower when working with a builder. As the construction component progresses, your home loan balance will increase in line with the stage that is being completed by the builder. The progress payment schedule is a very important feature of construction home loans because you don’t start paying interest until the each progress payment has been paid to the builder.
In order for the lender to make each progress payment to the builder, the borrower must fill out the lenders drawdown request form and submit it to their builder. The builder can then submit their invoice and the associated drawdown request form to the lender. Once the lender is satisfied that the work has been completed, the drawdown can be completed. Depending on the requirements of the lender, a valuer can be instructed to inspect the construction to ensure that the work has been completed to a satisfactory level before paying the builder.
Throughout the construction process most home loan lenders will allow borrowers to make interest only payments. Borrowers can then convert their home loan to principal and interest repayments once the construction process has been completed. There are generally five stages in which the lender will make progress payments directly to the builder, these include the following:
Stage 1 - Base
The base stage progress payment is typically 15% of the fixed price building contract
This stage includes ground levelling, measuring out the site design, under slab drainage, moisture barrier installation and slab pouring
This stage typically takes between 1 to 2 weeks to complete
Stage 2 - Frame
The frame stage progress payment is typically 20% of the fixed price building contract
This stage includes internal and external support structures, partial brickwork, conduit installation for electrical and plumbing, roof frame, sheeting, gutters and insulation
This stage typically takes between 3 to 4 weeks to complete
Stage 3 - Lockup
The lockup stage progress payment is typically 20% of the fixed price building contract
This stage is focused on making the property safe and secure in preparation for the fit out
This stage includes the installation of all the remaining windows, doors and walls
This stage typically takes between 3 to 4 weeks to complete
Stage 4 - Fit Out
The fit out stage progress payment is typically 30% of the fixed price building contract
This stage includes the installation of all the plumbing and electrical fittings
Design features like cornices, tiling, cabinets, benches, shelving will also be installed
This stage typically takes between 5 to 6 weeks to complete
Stage 5 - Completion
The completion stage progress payment is typically 10% of the fixed price building contract
This stage includes the completion of all painting, plumbing, electrical and cleaning
The builder will handover the property once they have received the last progress payment
This stage typically takes between 7 to 8 weeks to complete
Additional works
A fixed price building contract leaves little room for making changes whilst the construction process is underway. Depending on your building contract, your driveway will still need to be poured and landscaping will need to be undertaken after the construction has been completed. Other additional works may include installing your garage door, a swimming pool, a verandah or even a shed. Most fixed price building contracts don’t include these additional works because they are specialty areas, so you’ll need to organise your own contractors for these projects.
It is important to keep in mind that once the construction process has been completed, you generally have 3 to 6 months to notify the builder of anything else that needs to be fixed or repaired. During the stages of construction, some aspects of the property can sometimes be overlooked or not be completed to a high standard. Proactive homeowners should create a list to make the builder aware of them in one go, rather than going back and forth with delays. You may only notice problems during certain times of the year or in certain weather conditions, such as noticing a hole in the roof or a blocked stormwater pipe when it’s raining.
Common problems
Problems can quickly arise when work on the construction site that isn’t being completed by the contracted builder needs to be paid for. This can be problematic because some lenders will only make the remaining funds of the mortgage available after reaching completion. Whilst some builders will include subcontractors as part of their fixed price building contract, others will not do this. This could mean that you need to pay for the work to be completed from your own pocket.
Lenders will typically release the first progress payment when certain requirements have been met, such as providing council approved plans, insurances and building specifications. However, some builders might require a 5% deposit in advance to prepare the required documentation. You can argue with your lender to advance the funds in lieu of the missing documents, however the better approach is to have the extra funds available to keep the project moving forward.
Whether you’re building a new home, renovating an existing property, subdividing vacant land, or completing a development project - there are financial products that are designed for your specific circumstances. Before you commence the construction process, we strongly recommend speaking with your trusted Mortgage Broker. They will be able to conduct a thorough financial assessment and have a detailed discussion with you about your current lending situation.
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We provide a convenient service
Mortgage Brokers save you the time and hassle involved in applying for a home loan - from application through to settlement. We'll meet at a time and place that best suits you, to establish your needs and preferences. We then do all the research and running around to manage every step of the application process. This saves you shopping around - as we do it all on your behalf.
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We are fully trained, and accredited with every lender we represent. We are full members of the Mortgage & Finance Association of Australia and we have many years of industry experience. We also have a number of consumer protection initiatives in place to protect you - our valued clients. As mortgage professionals, we seek to guide you through the lending process to help you make better financial decisions.
We help you select the right home loan
Our first priority is helping you select the home loan that’s right for you, now and into the future. Your Mortgage Broker will save you the time and hassle associated with shopping around for a home loan, they will also guide you through the home lending process to help you make better choices with your personal finances.
We will always try to save you money
We use comprehensive software which helps us pinpoint the most suitable and competitive home loan for you. Typically, our service can help cut the current interest rate you are paying as well as reduce your fees and monthly repayments. Using a Mortgage Broker is also a great way to figure out a strategy to maximise your borrowing power.
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There is no charge to you for our services because the lender pays us a commission once your loan has settled. We do charge a commitment fee for home loan pre-approval applications, however we will refund this to you upon settlement of your home loan. We will always aim to provide a trusted, friendly and professional mortgage broking service.
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FAQs
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Yes. If you intend to build a new home, you will need to finance and purchase the vacant land first. This means there are two loan applications, one for the vacant land and another for the construction component. Borrowers can apply for a construction home loan when the relevant documentation is ready, this includes the following:
Fixed price building contract
Council approved plans
Progress payment schedule
Builders insurance details
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No. You cannot use seperate lenders to finance the vacant land and the construction component. The only way you can do this is by borrowing against the equity in another property.
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Yes. A construction home loan will typically incur additional valuation costs. Valuations ensure that the property is on track, and that it is being built in accordance with the fixed price building contract.
Lenders will need to complete additional work to manage the progress payments associated with a construction home loan. Additional fees will be charged by the lender at each progress payment.
Although there are extra costs associated with construction home loans, the lending market remains very competitive. Construction home loan interest rates are also priced the same way as standard home loans.
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Yes. There are some lenders that can facilitate construction home loans to owner builders. Some of the key requirements include the following:
Completion of an owner builder independent advice report
Evidence that you have sufficient funds to complete the project prior to receiving a formal lending approval
Establishing that there is a clear financial benefit for completing the project as an owner builder
Demonstration of your prior experience and background to successfully complete the project as an owner builder
Because there are fewer lenders that can accept owner builder projects, these requirements must be met for the lender to approve your construction home loan.
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Yes. You can use a construction home loan to finance and build an investment property. We have many clients who utilise this strategy to save on stamp duty. By taking on the risk of the construction process, it is possible for investors to experience a capital gain.
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Home loan lenders will apply their normal lending policies for construction home loans. This means that the standard loan to value ratio is 80%. Home loan lenders will apply lenders mortgage insurance when the loan to value ratio is between 80% to 95%.
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When the construction process has been completed, your home loan lender will organise a final inspection of the property. The lender will ensure that the build has been completed in accordance with the original building plans, and that the value of the completed property is sufficient to secure your home loan. Once this process is finalised, your construction home loan will then revert to a standard home loan. If you need to make adjustments to your home loan, your trusted Mortgage Broker can assist you further.